By Sarah Baker

As the local commercial real estate market approaches the end of 2011, experts say it appears to be in line with national fundamentals for secondary and tertiary markets.

IDEXX Laboratories employees work in the recently completed distribution center, which is part of the company’s $13.5 million multi-year expansion of its reference laboratory and distribution center. (Photo: Lance Murphey)

Shelby County commercial sales in the third quarter were the highest sales volume since Q3 2007, with $259 million, according to real estate information company Chandler Reports, www.chandlerreports.com.

But as with most other markets, Memphis has been affected by the slow economy, and more recently, by the struggling financial markets, said Brad Murchison, senior associate with CB Richard Ellis Memphis.

“We had a full steam ahead of activity throughout most of the year, but as we get into the third quarter and the financial markets started going a little bit bonkers, most of our activity still remained, but everything pretty much just kind of slowed down,” Murchison said.

But if one takes into account Memphis’ logistical capabilities – including five Class I railroads, several interstate highways, the nation’s fourth-busiest inland waterway port and the world’s second-largest cargo airport – the city is well-positioned to attract firms looking to consolidate by merging multiple distribution centers together, Murchison said.

And there are a handful of lease transactions to prove it. Top deals inked during the third quarter include Nike Inc. adding 400,000 square feet to its local portfolio in Prologis Inc.’s Centerpointe Distribution Center No. 1; Cummins Inc.’s 371,233-square-foot lease occupying all of Southpark Distribution Center H; CEVA Logistics U.S. Inc.’s 285,500-square-foot lease in Southpoint VII; and Kuehne + Nagel’s 116,867-square-foot lease in DeSoto’s Trade Center I.

A snapshot of the Memphis industrial markets shows 147,697 square feet of positive overall absorption in the third quarter, bringing the total to 81,462 square feet for the year, according to CBRE’s Q3 MarketView.

But by year’s end, the market could reach more than 1 million square feet of absorption if and when Trane U.S Inc. executes its 625,000-square-foot lease and Kimberly-Clark Corp. inks its 400,000-square-foot space with growth potential up to 500,000 square feet, Murchison said.

As far as vacancy, the Memphis Metropolitan Statistical Area stood at 17.8 percent as of Sept. 30, according to CBRE’s report. Murchison considers a healthy vacancy range somewhere between 10 and 12 percent – meaning about 6 million feet needs to be added.

But it’s exactly how long it will take Memphis to get there that he calls “the million-dollar question,” since he doesn’t anticipate speculative construction to be quiet for long.

“As long as spec construction is at a minimum, we could probably hit that number with good leasing velocity probably within two to three years,” Murchison said. “Memphis has a lot of major developers – IDI, Panatoni, ProLogis, Hillwood – all these guys, more particularly IDI, have been looking to bring a building up out of the ground. Some recent reports say these guys are considering breaking ground in 2012.”

On the office side, vacancy rates appear to be high yet mostly unchanged over the past several quarters.

Henry Stratton, vice president of brokerage services with Colliers International, said it’s hard to give a definitive answer on whether Memphis has hit the bottom.

“Right now with the uncertainty’s that’s out there, when company’s leases are coming up for renewals, frequently, they will renew but say, ‘We want to give back 10 percent of the space that we lease,’” Stratton said. “People are looking at shaving costs everywhere they possibly can right now. As we continue to see the situation where we’re not creating new office jobs in Memphis, I think that we might continue to see the vacancy get just a little bit worse.”

Despite third quarter rental rates seeing one of the larger overall increases in the recent past, Stratton is hesitant to paint the entire market with one brush, citing Class A suburban rates as being the main driver for pushing those numbers upward. Because there is a huge difference in quoted rates and rates at which deals are actually being executed.

“At some point, we’ll probably see more landlords start to get their quoted rates in line with the rates at which deals are being done in hopes of being included in the initial short list,” Stratton said. “The landlords are quoting a higher rate than what they’re really willing to do a deal.”

Also circling the market are investors seeking prime Class A office and industrial assets, said Wyatt Aiken, chief operating officer and executive vice president of Commercial Advisors LLC.

Parkway Properties Inc.’s sale of Renaissance Center in the Poplar Avenue and Interstate 240 corridor is expected to close by year’s end, along with an investment sale package that Aiken couldn’t discuss but one “that’s gotten very good attention from national, top-notch investors,” he said.

“There’s a fair amount of capital out there looking for investment grade office and industrial properties,” Aiken said. “Depending on the buildings, if they can buy buildings for less than replacement costs, generally investors are willing to pay a lower (capitalization) rate than we were anticipating for this year.”